The adverse effects on Disney stock from disappointing ESPN results have been well-noted, and some think selling or spinning off ESPN might help Disney’s overall stock performance. Bloomberg’s Tara LaChapelle has a good history of this idea and the latest developments on it:
Back in May, I wrote that a breakup of Disney may be [the] answer. Separating ESPN (or the media networks division altogether) could not only help lift the company’s sagging valuation, but also make it a little easier to find a successor. Recall that Tom Staggs, the Magic Kingdom’s heir apparent, abruptly stepped down as chief operating officer earlier this year. And former CFO Jay Rasulo, the other possible pick, quit in 2015.
…Last month, billionaire John Malone — the dealmaker of all media dealmakers — speculated that Disney may spin off or sell ESPN, along with maybe ABC. He then went so far as to say Apple Inc. may be interested in merging with Disney after the split. The Edge, which analyzes spinoffs, has written about a Disney breakup, too, noting that the media networks and the rest of Disney “lack sufficient synergies and have vastly different outlooks and business model challenges.”
Now, RBC Capital Markets analyst Steven Cahall is jumping on the bandwagon. In a report Monday, Cahall wrote that ESPN “has almost single-handedly de-rated Disney by about 3.5 to 4 turns” of its Ebitda multiple. After the stock got a small pop Monday, Disney was valued at 10.7 times the Ebitda it generated in the past 12 months. That’s down from a multiple of nearly 14 about a year ago, according to data compiled by Bloomberg.
It seems hard to dispute that worries about ESPN and its lost subscribers are playing a significant role in valuations of Disney stock, as they’re cited in every single earnings call and analysis. Justin Pope of SeekingAlpha argues that the worries about ESPN are drastically damaging perceptions of Disney, which has plenty of other strengths:
If one looks closely, it is plain to see that Disney is stacking cash hand, over fist – even with the ESPN struggles factored in. A few weeks ago, Disney reported its full year results for 2016. Disney managed some eye popping figures such as:
- 6% revenue growth.
- 12% net income growth.
- 17% earnings per share growth.
- 10% dividend increase.
- 27% increase in free cash flows.
Disney pulled this off, even though the company lost the most ESPN subscribers in over a decade this year.
Selling ESPN could also clear the way for Disney to team up with other companies that seem like more natural fits, and it could bring in plenty of cash as well according to this SeekingAlpha summary of Cahall’s position:
Disney’s (NYSE:DIS) underperformance this year indicates investor unease surrounding ESPN, says RBC’s Steven Cahall. A sale or spin of the unit would thus eliminate an overhang and put Disney more “in-play” for M&A.
He thinks Disney may be able to find a financial buyer of ESPN for $22B for an 80% stake, or $2 per share, fully taxed.
A strategic buyer, however, might pay considerably more.
Cahall’s got Sector Perform rating and $101 price target on the stock.
This approach isn’t without its own issues, though. For one thing, ESPN (and ABC) are pretty tied in to Disney at this point, and they wouldn’t be easy to untangle. Any offer from a “strategic buyer” would also come under substantial government scrutiny and might not pass it, as the proposed AT&T – Time Warner deal shows. Beyond that, there’s value for Disney in the subscriber fees, ratings and more ESPN still brings to the table, and ESPN’s still the behemoth out there in the cable sports world. Having ESPN can be very useful in distributor negotiations, making it easier to get leverage for the carriage of other channels. It should also be noted that Hearst Corp. owns 20 per cent of ESPN and might need to approve of any move of this sort.
Moreover, owning ESPN can be useful for Disney from a synergy perspective. Intertwining ESPN and ABC has been beneficial on several levels, and splitting those two up wouldn’t be easy. ESPN and ABC also both do plenty of things that work with other Disney efforts, such as ABC’s Disney Parks specials, ESPN’s lightsaber duel features, trailers for Disney movies debuting on the channels and more. And keep in mind Disney’s recent $1 billion deal for a one-third stake in BAMTech, which is a key part of ESPN’s forthcoming over-the-top offering. That streaming technology could carry benefits to the company at large, just ESPN and ABC. Beyond that, unloading content companies like ESPN would be very much against the consolidation we’re seeing elsewhere in the market.
Thus, despite the potential advantages of selling or spinning off ESPN and having the Disney bottom line unaffected by issues at the Worldwide Leader, there are some hazards to this approach as well. Every sale makes some sense at some price point, but the bigger question here is if anyone would be willing to offer enough to make it worth Disney’s while to actually part ways with ESPN. ESPN certainly hasn’t been great for Disney’s stock lately, but that doesn’t make it a company without substantial value, and there are some ESPN-ABC-Disney synergies that do work well. We’ll see where this goes.
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